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Key Changes to the New NAFTA

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The White House released a statement yesterday announcing the negotiation of the new United States-Mexico-Canada Agreement, or USMCA. The statement positions the agreement as the fulfillment of President Trump’s promise to replace the existing North American Free Trade Agreement (NAFTA), which he has long derided as the “worst trade deal ever signed.”

The USMCA agreement text has 34 chapters addressing such areas as agriculture, investment and intellectual property. It also contains “agreement annexes” and a dozen “side letters” providing clarification and assurances.

The agreement is a step towards keeping the 25-year-old, three-country NAFTA trading bloc intact. After reaching a bilateral agreement with Mexico in August, the US had imposed a deadline of September 30 for Canada to join the accord or get left out. Canada and the US used nearly every minute of that allotted time, reaching an agreement on Sunday night. Sunday’s pact capped what The Toronto Star calls “an acrimonious 13-month negotiation that had hindered the Canadian economy and damaged relations between the two countries.”

While the new agreement is significant — the three countries engage in over a $1 trillion worth of trade annually — it is not yet law. Canada’s and Mexico’s legislatures are expected to clear the agreement, but the situation is more complicated in the US. Politico explains that Congress won’t hold a formal vote until next year, and “it is still an open question whether lawmakers — including members of the president's own party who have often clashed with him on trade — will fall in line to support the deal.” The agreement’s chances of passing may also be diminished if Democrats gain control of the House of Representatives after November’s midterm elections.

At this point, lawmakers, companies, economists and others have had little time to review the new agreement, since details were kept confidential during negotiations. That said, here are some of the significant provisions people are talking about now. Note the agreement does not address the steel and aluminum tariffs recently imposed by the US on Canada and Mexico (along with the EU), nor Canada’s and Mexico’s respective retaliatory tariffs. US Trade Representative Robert Lighthizer said Sunday those tariffs will be negotiated separately.

Agriculture (Chapter 3)

Perhaps surprisingly, one of the most contentious issues during the US-Canada trade negotiations has been the subject of dairy products. The White House statement says that under the new agreement, Canada “will eliminate its ‘Class 7’ program that allows low-priced dairy ingredients to undersell American dairy products” and “provide new access for American dairy products, eggs and poultry.”

The Guardian explains that Canada has “agreed to provide US dairy farmers access to about 3.5 percent of its approximately $16 billion annual domestic dairy market” and is “prepared to offer compensation to dairy farmers hurt by the deal.” Virtually all commentators agree that Canada’s concession on dairy products gave them the leverage needed to retain NAFTA’s current dispute-settlement process (addressed below).

Rules of Origin (Chapter 4)

The White House statement says that under the new agreement, “American auto manufacturers and workers will benefit from new rules of origin requiring 75 percent of auto content to be produced in North America.” This is a substantial increase from NAFTA’s current requirement of 62.5 percent.

The new rules of origin also contain requirements and incentives for the use of high-wage manufacturing labor in the auto industry. Forty percent of new vehicles must be produced by workers earning at least US$16 per hour, about three times the average wage of a Mexican factory worker. The Wall Street Journalsays to think of this provision “as a cap on the amount of parts coming from low-wage Mexico. But companies get credit for high-wage research and development.”

The New York Times reports that some analysts warn the provision may lead to increased car prices in the US and an incentive for “automakers to move production to low-cost countries outside the United States, such as China.”

Financial Services (Chapter 17)

The Wall Street Journal explains that big banks can “claim a victory” with the USMCA. The new agreement gives banks “the freedoms they’ve long been seeking” with regard to where they can locate their servers. This aspect of the USMCA stands in contrast to the Trans-Pacific Partnership (TPP) agreement, which requires banks to maintain servers in countries where they have operations.

Intellectual Property (Chapter 20)

The White House statement says the USMCA “includes a modernized, high-standard chapter that provides strong protection and enforcement of intellectual property rights … [including] 10 years of data protection for biologic drugs and a large scope of products eligible for protection.” The Star notes that this 10-year protection for pharmaceutical companies is up from eight years under NAFTA, and “opposed by generic drug makers.” (The TPP agreement offers “as little as five years of exclusivity.”)

The Washington Postsays of the extensive chapter on intellectual property: “many business leaders and legal experts believed these updates were necessary given that the original agreement was negotiated 25 years ago,” before the advent of digital commerce.

Labor (Chapter 23)

President Trump’s statement boasts that the “USMCA’s labor chapter represents the strongest labor provisions of any trade agreement.” The chapter has a section requiring Mexico’s labor laws to give workers the right to engage in collective bargaining and join the union of their choice without being coerced or discriminated against.

These worker rights — along with the agreement’s $16-per-hour provision — would presumably lead to increased wages in Mexico, and to a reduction of outsourced jobs from the US. The Wall Street Journal observes, however, that “some Democratic lawmakers say they aren’t satisfied with the level of enforceability of these labor provisions.”

Dispute Settlement (Chapter 31)

Yesterday’s White House statement does not mention dispute settlement, no doubt because US negotiators had wanted to do away with NAFTA’s Chapter 19 dispute-settlement process on the grounds that it infringes on US sovereignty. The process allows a bloc member to dispute duties imposed by another member before a NAFTA panel. Canada regarded this collective process as an essential part of any US-Canada-Mexico agreement, as Canada has used it to “appeal [US] duties on things like softwood lumber.”

Final Provisions (Chapter 34)

President Trump wanted a five-year termination clause written into the current USMCA, but settled for a 16-year agreement with a joint review of the agreement’s operation after six years from its effective date. At the joint review, “each party shall confirm, in writing, through its head of government, if it wishes to extend the term of the agreement for another 16-year period.”

Canadian and Mexican officials have complained that even a 16-year term with an option to renew creates uncertainties that could hurt their respective economies.

Two side letters to the agreement indicate that even if the US imposes tariffs on imported passenger vehicles in the future (which President Trump has threatened to do), Canada and Mexico will be exempt. The exemption will apply to the first 2.6 million passenger vehicles each country exports. 2.6 million is slightly more than the number of vehicles Mexico exported to the US last year, and about 1 million more than Canada exported.

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